More War on Waste: Do Hospitals Profit from Complications?

Gawande has struck again, concluding in his recent JAMA article that “some hospitals have the potential for adverse near-term financial consequences for decreasing post-surgical complications” (aka, they’ll make more profit if they let complications happen). In a follow-up article entitled “Hospital Profits Linked to Patients with Surgical Complications,” the Huffington Post rephrased it this way: “Patients who suffer complications after surgery are lucrative for hospitals.” How grotesque.

And in an accompanying editorial, Reinhardt, the economist who trumpeted the “physician surplus” 15 years ago when that was popular, quickly added that the fault may be the fee-for-service payment system that rewards volume rather than quality, today’s bandwagon. And everyone has jumped on the band wagon. But remember McAllen? Everyone jumped on that, too. It took a while to figure out that the McAllen story was poppycock.

First, what were these complications? More than half were MIs, cardiac arrests, pneumonias or strokes. Another 15% were use of a ventilator for more than 96 hours, which is never preventable (one wishes it could be). Only 10% were wound-related (a total incidence of 0.5%). None were events that physicians or hospitals want. The remarkable thing is how few of the complications were avoidable. How do you prevent a stroke? Nonetheless, the implication was that hospitals and their doctors egregiously and selfishly tolerate errors to increase profits and that the fee-for-service system enables such behavior. Once again, the public has been poorly informed.

So how did hospitals profit from all of this? Please bear with me because the numbers in the article are a little complicated. I will try to simplify them.

For uncomplicated patients, who length of stay averaged 3 days, the margin earned by hospitals, after paying for variable costs (nurses, medications, etc.), was a little over $2,500 per day, a total of $7,600 for a 3-day admission.

Complicated patients stayed an extra 11 days, and although the margin for them was less (about $750 per day), the extra 11 days yielded an extra $8,100. That is what led Gawande et al to claim that hospitals make more. An extra $8,100 per admission.

The problem is that hospitals don’t run on variable costs alone. There are fixed costs, like buildings, maintenance, equipment, administrative staff, etc. In the Gawande study, these were $2,200 per day. When these were also considered, uncomplicated patients produced a net profit of $300 per day for 3 days, yielding a total profit of $1,000 per admission. Complicated patients produced a loss of $765 per day for 11 days, or $8,400, which was offset by a surplus of $1,000 from the first 3 days to yield a net loss of $7,400 per admission.

How do complications make money for hospitals if complicated patients are a loss? Gawande’s answer is that the hospitals aren’t full anyway, so the fixed costs are there with nobody to pay for them, and whatever extra revenue can be derived from complications is simply gravy, even if it’s less than the revenue from uncomplicated patients.

The implication is that hospitals encourage or at least permit complications to keep their beds full and earn an extra $750 per day. But how do they promote MIs or pneumonia, and do they really keep people on ventilators needlessly for more than 96 hours? Unfortunately, no one will look at the details. They didn’t in McAllen, either. JAMAs editors must nor have looked at the details, either.

And so, the “War on Waste” continues. To win that war, it is said, the US must get rid of fee-for-service reimbursement, which, in Reinhardt’s words, “can tempt otherwise admirable people into dubious conduct.”

Yes, as the events in Boston vividly showed, they are admirable. They are professionals. They deal with patients who will assuredly have complications that no one wants nor can avoid, least of all the physicians who are caring for them and the hospitals in which they are receiving care.